By: Hancock (Senate Sponsor - Van de Putte) H.B. No. 3161
(In the Senate - Received from the House May 6, 2011;
May 9, 2011, read first time and referred to Committee on State
Affairs; May 17, 2011, reported adversely, with favorable
Committee Substitute by the following vote: Yeas 9, Nays 0;
May 17, 2011, sent to printer.)
COMMITTEE SUBSTITUTE FOR H.B. No. 3161 By: Van de Putte
A BILL TO BE ENTITLED
AN ACT
relating to limited purpose subsidiary life insurance companies.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Chapter 841, Insurance Code, is amended by
adding Subchapter I to read as follows:
SUBCHAPTER I. LIMITED PURPOSE SUBSIDIARY LIFE INSURANCE COMPANIES
Sec. 841.401. PURPOSE. The purpose of this subchapter is to
authorize the establishment of domestic limited purpose subsidiary
life insurance companies to enable those companies to support
excess reserves for certain life insurance policies.
Sec. 841.402. DEFINITIONS. In this subchapter:
(1) "Affiliated company" means:
(A) domestic life insurance companies that are
directly or indirectly wholly owned subsidiaries of the same
holding company; or
(B) controlled persons.
(2) "Appointed actuary" means the actuary who is
appointed by a limited purpose subsidiary life insurance company to
render the actuarial opinion required by Subchapter B, Chapter 425.
(3) "Ceding insurer" means a company that cedes risk
to a limited purpose subsidiary life insurance company under a
reinsurance contract and that is:
(A) a domestic life insurance company that is the
parent of a limited purpose subsidiary life insurance company; or
(B) an affiliated company of a limited purpose
subsidiary life insurance company.
(4) "Controlled person" means a person organized or
authorized to do business under the laws of this state that is
controlled directly or indirectly by a holding company.
(5) "Excess reserves" means the amount of statutory
reserves determined to be redundant by the appointed actuary for
life insurance policies whose reserves are calculated under 28
T.A.C. Chapter 3, Subchapter EE. Excess reserves may not be an
amount greater than the difference between the reserves calculated
using 28 T.A.C. Chapter 3, Subchapter EE, and the reserves
calculated using generally accepted accounting principles.
(6) "Guarantor" means a holding company or an
affiliated company under Section 841.417 of the limited purpose
subsidiary life insurance company that is a party to a guaranty.
(7) "Guaranty" means a commissioner-approved
agreement by a guarantor with sufficient equity and financial
strength to pay, during the life of the guaranty, an amount equal to
the specified obligations of a limited purpose subsidiary life
insurance company, less the equity of all ceding insurers that are
subsidiaries of the guarantor, to satisfy the agreement.
(8) "Holding company" means a person that directly or
indirectly controls an insurer.
(9) "Insurer" means a domestic life insurance company
organized under this chapter.
(10) "Letter of credit" means a clean, unconditional,
irrevocable letter of credit issued or confirmed by a qualified
United States financial institution, as defined by Section
492.104(b)(2)(C).
(11) "Limited purpose subsidiary life insurance
company" means a limited purpose subsidiary life insurance company
organized under this subchapter:
(A) that is wholly owned by a life insurance
company or an affiliated company; and
(B) to which the commissioner issues a
certificate of authority under this chapter.
(12) "Material transaction" means a transaction or
series of transactions involving amounts equal to or exceeding
three percent of a limited purpose subsidiary life insurance
company's admitted assets.
(13) "Organizational document" means a limited
purpose subsidiary life insurance company's articles of
incorporation and the company's bylaws.
(14) "Organizing company" means the company that
organizes a limited purpose subsidiary life insurance company under
this subchapter.
(15) "Parent" means a person that directly or
indirectly controls through one or more intermediaries, or wholly
owns, a limited purpose subsidiary life insurance company.
(16) "Person" has the meaning assigned by Section
823.002.
(17) "Reinsurance contract" means a contract between a
limited purpose subsidiary life insurance company and a ceding
insurer under which the limited purpose subsidiary life insurance
company agrees to provide reinsurance to the ceding insurer for
certain risks.
(18) "Risk" means a risk associated with life
insurance policies written on or after the effective date of this
chapter by a ceding insurer, or assumed by a ceding insurer from an
affiliated company under life insurance policies which were written
on or after the effective date of this chapter, by the affiliated
company and for which the ceding insurer calculates statutory
reserves for those policies pursuant to 28 T.A.C. Chapter 3,
Subchapter EE.
Sec. 841.403. ORGANIZATIONAL DOCUMENTS. (a) A wholly
owned domestic insurer authorized to transact the business of
insurance under this chapter or an affiliated company organized or
authorized to conduct business under the laws of this state may
organize a limited purpose subsidiary life insurance company under
this subchapter.
(b) A limited purpose subsidiary life insurance company may
reinsure risks of the organizing company and of an affiliated
company.
(c) A limited purpose subsidiary life insurance company's
organizational documents must:
(1) limit the company's authority to transact the
business of insurance to reinsuring only the risks of a ceding
insurer;
(2) provide that the limited purpose subsidiary life
insurance company may not otherwise engage in the business of
insurance; and
(3) provide that the limited purpose subsidiary life
insurance company must always be wholly owned by a domestic insurer
authorized to transact the business of insurance under this chapter
or by an affiliated company organized or authorized to do business
under the laws of this state.
Sec. 841.404. CERTIFICATE OF AUTHORITY REQUIRED. A limited
purpose subsidiary life insurance company may not engage in the
business of reinsurance in this state unless the limited purpose
subsidiary life insurance company obtains from the commissioner a
certificate of authority under this subchapter.
Sec. 841.405. APPLICATION FOR CERTIFICATE OF AUTHORITY. To
obtain a charter for a limited purpose subsidiary life insurance
company, the incorporators of the company shall pay to the
department a charter fee in an amount determined under Chapter 202
and file with the department:
(1) an application for charter on the form prescribed
by, and containing the information prescribed by, the commissioner;
(2) the company's articles of incorporation;
(3) an affidavit made by the company's president, vice
president, treasurer, or chief financial officer stating that:
(A) the minimum capital and surplus requirements
of this subchapter are satisfied;
(B) the capital and surplus are the bona fide
property of the company;
(C) the information in the articles of
incorporation is true and correct;
(D) the proposed organization and operation of
the limited purpose subsidiary life insurance company comply with
all applicable provisions of this subchapter;
(E) the limited purpose subsidiary life
insurance company's investment policy reflects and takes into
account the liquidity of assets and the reasonable preservation,
administration, and management of those assets with respect to the
risks associated with the reinsurance contract; and
(F) any reinsurance contract and any arrangement
for securing the limited purpose subsidiary life insurance
company's obligations under the reinsurance contract, including
any agreements or other documentation to implement the arrangement;
(4) a business plan that includes pro forma financial
statement projections that demonstrate how the limited purpose
subsidiary life insurance company will comply with Section 841.412;
(5) a copy of any proposed guaranty that demonstrates
how compliance with Sections 841.412 and 841.417 will be achieved;
(6) an opinion of a qualified independent actuary
acceptable to the commissioner that the methodology and assumptions
used to set and discount reserves make good and sufficient
provision for the risk assumed by the limited purpose subsidiary
life insurance company, including significant stress tests on key
assumptions; and
(7) any other statement or document required by the
commissioner to evaluate the limited purpose subsidiary life
insurance company's application for a certificate of authority.
Sec. 841.406. INVESTMENT OF CERTAIN SURPLUS BY ORGANIZING
COMPANY. If the company that organizes a limited purpose
subsidiary life insurance company is a domestic life insurance
company, the organizing company may invest funds from the
organizing company's surplus in the limited purpose subsidiary life
insurance company.
Sec. 841.407. OFFICERS AND DIRECTORS. The officers and
directors of a company that organizes a limited purpose subsidiary
life insurance company may serve as officers and directors of the
limited purpose subsidiary life insurance company.
Sec. 841.408. ISSUANCE OF CERTIFICATE OF AUTHORITY.
(a) The commissioner may issue a certificate of authority to a
limited purpose subsidiary life insurance company, authorizing the
company to transact reinsurance business in this state as a limited
purpose subsidiary life insurance company based on a finding that:
(1) the company's application meets the criteria
contained in this subsection;
(2) the proposed plan of the limited purpose
subsidiary life insurance company provides for viable operation of
the company, including a determination by the commissioner that the
limited purpose subsidiary life insurance company applicant has
sufficiently strong financial support;
(3) the guaranties meet the requirements of Section
841.417;
(4) the terms of any reinsurance arrangement,
including the reinsurance contract and related transactions,
comply with this subchapter and all applicable insurance laws and
rules;
(5) the proposed application and reinsurance
arrangement is not hazardous to any ceding insurer; and
(6) the proposed application and reinsurance contract
will always fund authorized investments that comply with Section
841.412, including statutory reserves for life insurance with
invested assets at least equal to the amount of reserves required
under generally accepted accounting principles.
(b) In conjunction with the issuance of a certificate of
authority under this section, the commissioner may issue an order
that includes any provisions, terms, and conditions regarding the
organization, licensing, and operation of the limited purpose
subsidiary life insurance company that the commissioner deems
appropriate and that are not inconsistent with this chapter,
including requesting from the company information to monitor the
financial strength of guarantors and requiring the periodic
reporting and monitoring of assets behind any guaranties issued.
Sec. 841.409. SCOPE OF CERTIFICATE OF AUTHORITY. (a) A
limited purpose subsidiary life insurance company that has been
issued a certificate of authority may reinsure only the risks of a
ceding insurer. A limited purpose subsidiary life insurance
company may not otherwise engage in the business of insurance.
(b) A limited purpose subsidiary life insurance company may
purchase reinsurance to cede the risks assumed under a reinsurance
contract.
(c) A limited purpose subsidiary life insurance company
organized under this subchapter is considered to be licensed to
transact the business of reinsurance for the purposes of Section
492.051, but may only reinsure risks of the company's affiliated
companies.
(d) A limited purpose subsidiary life insurance company
shall provide the commissioner with notice of any change in the
company's business plan required by Section 841.405, including any
material change in the methods used to comply with Section 841.413.
Sec. 841.410. CAPITAL AND SURPLUS. (a) The commissioner
may not issue a certificate of authority to a limited purpose
subsidiary life insurance company unless the company possesses and
maintains unimpaired paid-in capital and surplus of not less than
$10 million.
(b) A limited purpose subsidiary life insurance company
shall comply with the risk-based capital requirements adopted by
the commissioner by rule.
(c) A limited purpose subsidiary life insurance company
shall maintain risk-based capital in an amount that is at least
equal to 300 percent of the authorized control level of risk-based
capital adopted by the commissioner.
Sec. 841.411. FORECLOSURE ON COLLATERAL. A limited purpose
subsidiary life insurance company shall immediately notify the
commissioner of any action by a ceding insurer or any other person
to foreclose on, or otherwise take possession of, collateral
provided by the limited purpose subsidiary life insurance company
to secure an obligation of the company.
Sec. 841.412. MINIMUM AUTHORIZED INVESTMENT REQUIREMENT
AFTER CREDIT FOR REINSURANCE; LETTERS OF CREDIT; GUARANTIES.
(a) A limited purpose subsidiary life insurance company shall hold
investments authorized under Subchapters C and D, Chapter 425,
exclusive of investments in affiliates, in an amount that at least
equals the sum of:
(1) the minimum capital and surplus requirements of
Section 841.410;
(2) the risk-based capital requirements adopted by the
commissioner; and
(3) reserves calculated using generally accepted
accounting principles.
(b) Subject to compliance with Subsection (a) and
notwithstanding Chapter 425, a limited purpose subsidiary life
insurance company may reduce the amount of the company's excess
reserves on account of:
(1) reinsurance that complies with Chapter 492;
(2) a letter of credit that complies with Section
492.104(b)(2)(C); or
(3) guaranties from a holding company or an affiliated
company as provided by Section 841.417.
(c) Notwithstanding Subsection (b), a limited purpose
subsidiary life insurance company may hold guaranties from a
holding company or an affiliated company as provided by Section
841.417 as an admitted asset with an offsetting increase in special
surplus funds to support excess reserves only.
Sec. 841.413. PERMITTED REINSURANCE. (a) A limited
purpose subsidiary life insurance company may only reinsure the
risks of a ceding insurer under a reinsurance contract.
(b) Unless otherwise approved in advance by the
commissioner, a limited purpose subsidiary life insurance company
may not assume or retain exposure to reinsurance losses for the
company's own account that are not funded by:
(1) premium and other amounts payable by the ceding
insurer to the limited purpose subsidiary life insurance company
under the reinsurance contract, or any return on the investment of
the premiums or other amounts;
(2) letters of credit that qualify under Section
492.104(b)(2)(C); or
(3) guaranties of a holding company or an affiliated
company as provided by Section 841.417.
(c) A limited purpose subsidiary life insurance company may
cede risks assumed under a reinsurance contract to one or more
reinsurers through the purchase of reinsurance, subject to the
prior approval of the commissioner. The commissioner may approve a
reinsurance contract under this subsection if the commissioner
finds that:
(1) the proposed reinsurance complies with Chapter
492;
(2) the proposed reinsurer has sufficient liquidity,
admitted assets, and policyholder surplus to support the
liabilities assumed under the reinsurance contract; and
(3) the proposed reinsurance contract would not result
in a hazardous financial condition for the limited purpose
subsidiary life insurance company.
(d) A limited purpose subsidiary life insurance company may
enter into contracts and conduct other commercial activities
related or incidental to, and necessary to fulfill the purposes of,
a reinsurance contract.
Sec. 841.414. REPORTS ON RESERVES AND RISK-BASED CAPITAL.
(a) A limited purpose subsidiary life insurance company annually
shall file an opinion of the appointed actuary acceptable to the
commissioner concerning the methods and assumptions used to set
reserves. The opinion must demonstrate that the limited purpose
subsidiary life insurance company holds risk-based capital and
invested admitted assets that are at least equal to reserves
specified by generally accepted accounting principles.
(b) The commissioner may reject the opinion of the appointed
actuary if the commissioner determines that accepting the opinion
would be hazardous to policyholders, enrollees, creditors, or the
public.
(c) A limited purpose subsidiary life insurance company
annually shall file with the commissioner a report of the limited
purpose subsidiary life insurance company's risk-based capital
level as of the end of the preceding calendar year containing the
information required by the risk-based capital instructions
adopted by the commissioner.
Sec. 841.415. OTHER LAWS NOT APPLICABLE. The deposit
requirements in Subchapter H do not apply to a limited purpose
subsidiary life insurance company.
Sec. 841.416. APPLICABILITY OF OTHER LAW. Except as
specifically provided by law, all provisions of this code apply to a
limited purpose subsidiary life insurance company formed under this
subchapter.
Sec. 841.417. GUARANTY REQUIREMENTS. (a) A guaranty may
not be used to comply with this chapter without the prior written
approval of the commissioner.
(b) Before approving a guaranty, the commissioner must find
that:
(1) the guarantor has capital and surplus of $100
million, exclusive of investments in subsidiaries and affiliates;
(2) the guarantor has admitted assets backing capital
and surplus in an amount sufficient to fulfill the guaranty, and the
sufficiency on an ongoing basis is demonstrated to the satisfaction
of the commissioner;
(3) the guarantor and all affiliates are in good
standing with the department;
(4) the guarantor has provided all information
requested by the commissioner; and
(5) the guarantor is otherwise acceptable to the
commissioner.
(c) Notwithstanding Subsection (b), the commissioner may
allow, subject to the commissioner's prior approval, an affiliated
company of the holding company to serve as guarantor. The
commissioner may approve an affiliated company as a guarantor on a
finding that the affiliated company possesses the independent
financial means to discharge the guaranty using the affiliated
company's own financial resources.
Sec. 841.418. SUNSET PROVISION. This subchapter is valid
for business sold only until January 1 of the year in which
principle-based reserve requirements become operative in Texas
under the adoption of the National Association of Insurance
Commissioners' 2009 amendments to the NAIC Model Standard Valuation
Law. After that January 1, the limited purpose subsidiary life
insurance company may not assume new risks of a ceding insurer
relating to business sold after that date.
Sec. 841.419. CERTIFICATION OF ACTUARIAL OFFICER. (a) At
the time a limited purpose subsidiary life insurance company files
an application for a certificate of authority under this
subchapter, and not later than March 1 of each year that a limited
purpose subsidiary life insurance company is in operation and is
ceded new business from a ceding insurer, a senior actuarial
officer of each ceding insurer shall file with the commissioner a
certification that the ceding insurer's transactions with the
limited purpose subsidiary life insurance company are not being
used to gain an unfair advantage in the pricing of the ceding
insurer's products.
(b) A ceding insurer may not be deemed to have an unfair
advantage if the pricing of the policies and contracts reinsured by
the limited purpose subsidiary life insurance company reflects, at
the time the policies and contracts were issued, a reasonable
long-term estimate of the cost to the ceding insurer of an
alternative third-party transaction, and uses current pricing
assumptions.
(c) The ceding insurer shall keep documentation between
examinations that sets forth the manner in which a senior actuarial
officer arrived at the conclusions in the certification.
Sec. 841.420. ACCOUNTING AND FINANCIAL REPORTING. The
commissioner shall prescribe accounting and financial reporting
requirements with regard to the limited purpose subsidiary life
insurance company and any insurer as defined by Section 841.402
that organizes a limited purpose subsidiary life insurance company.
SECTION 2. This Act takes effect immediately if it receives
a vote of two-thirds of all the members elected to each house, as
provided by Section 39, Article III, Texas Constitution. If this
Act does not receive the vote necessary for immediate effect, this
Act takes effect September 1, 2011.
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